2014 (4) TMI 1254 - AT - Income Tax

Trading addition - action of the AO in adopting percentage completion method and rejection of books of account - HELD THAT - It is an admitted fact that the Ld. CIT(A) deleted the impugned addition by following the case of M/s. Surya Estate Vs. DCIT 2012 (12) TMI 1189 - ITAT JODHPUR held that the profit declared on the basis of Project Completion Method is to be accepted and the addition cannot be made on the basis of Percentage Completion Method. - Decided against revenue.

Issues Involved:
1. Deletion of trading addition by adopting the percentage completion method.
2. Rejection of books of accounts by the Assessing Officer (AO).
3. Applicability of Accounting Standards AS-7 and AS-9.
4. Estimation of profit by the AO.

Detailed Analysis:

1. Deletion of Trading Addition by Adopting the Percentage Completion Method:
The primary issue in this case was whether the Assessing Officer (AO) was justified in adopting the percentage completion method for revenue recognition and rejecting the books of accounts maintained by the assessee. The AO argued that the assessee, involved in the business of constructing and selling flats, should have followed the percentage completion method as per the guidelines laid down in AS-7 and AS-9 by the Institute of Chartered Accountants of India (ICAI). The AO observed that the assessee had received advances and entered into sale agreements, which should have led to revenue recognition under the percentage completion method. However, the assessee contended that the project completion method was consistently followed, and no sale agreements were executed, only advances were received.

2. Rejection of Books of Accounts by the Assessing Officer (AO):
The AO rejected the books of accounts under section 145(3) of the Income Tax Act, citing that the assessee did not follow the percentage completion method and that there were discrepancies in the cash book and advances received. The AO also referenced seized documents indicating on-money transactions and incomplete books of accounts. The assessee argued that the books were audited, and no specific defects were pointed out by the AO. The CIT(A) found that the AO did not provide valid reasons for rejecting the audited books and that the AO's interpretation of on-money transactions was unsupported by independent evidence.

3. Applicability of Accounting Standards AS-7 and AS-9:
The AO applied AS-7 and AS-9, arguing that the percentage completion method should be followed. However, the CIT(A) noted that the revised AS-7, applicable from 2003, was not mandatory for builders and developers but only for contractors. The CIT(A) also found that AS-9 conditions for revenue recognition were not met, as no sale deeds or legally enforceable documents were executed. Therefore, the project completion method followed by the assessee was justified.

4. Estimation of Profit by the AO:
The AO estimated the profit at 20% of the work in progress, based on other cases, and added Rs. 84,40,241 to the assessee's income. The assessee argued that net profit should be applied to receipts/turnover, not work in progress. The CIT(A) found the AO's basis for estimation unjustified, especially since similar actions were not approved in other cases by the ITAT. The CIT(A) deleted the addition, noting that the AO's approach was contradictory and not supported by facts.

Conclusion:
The CIT(A) deleted the addition made by the AO, stating that the project completion method was appropriately followed by the assessee, and the AO's application of the percentage completion method and rejection of books of accounts were not justified. The ITAT upheld the CIT(A)'s decision, noting that similar issues had been resolved in favor of the assessee in other cases, and there was no valid ground to deviate from the CIT(A)'s findings. Consequently, the appeal by the department was dismissed.

← Previous Next →